Lower over indebtedness wider access to credit, and GDP

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Public / Private Partnerships in Credit
Reporting the Morocco experience
Lower over indebtedness wider access to credit,
and GDP growth, through Private Credit Bureaus
development
OSCAR MADEDDU - Rio de Janeiro - 22 October,
2008
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Contents

• . . . .1
• . . . . 2

A system to be reinvented
Recommended solution and lessons learned
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Background credit markets before project (2005)

• Small arena 16 banks, 22 NBFIs, 12 MFIS
• Elevated market concentration
• First 3 banks 54 bank loan market share
• First 3 NBFIs 65 NBFI loan market share
• First 3 M Is 84 MF market share
• Bankable population 25
• Bankscredit mainly to large firms V.I.P
  customers
• Strong MFI sector catering for banks absence
• Collateral the real king!

• Consumer credit in its infancy
• Market volumes 85 NBFIs - 15 banks
• Risible loans 435.000 per year (1.3 pop.)
• Main product personal loans
• Credit cards / revolving negligible
• Low ratio consumer Credit / GDP 12

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Credit market other issues

• In addition to limited, collateralized, selective
  credit access

• Elevated rejection rates

• Outrageous bad debt rate (particularly consumer
  credit)

• Weak profitability and a vulnerable credit system

• Insufficient risk management skills, tools and
  credit information
• The most affluent customers represented the
  poorest risk false positives
• While the best potential customers (medium
  income) were discriminated false negatives

A system to be reviewed!
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Information sharing background and issues (2005)

• No PCB existed but 3 different separate projects
  discussed ( Banks, NBFI, MFI)
• Only source of credit information
  Bank-Al-Maghribs PCR ( since 1978)
• Purposes supervision and dissemination of credit
  information to lenders
• Issues
• Biased to large exposures only corporate and
  large loans gt 100.000 DH
• Less than 20 of all Moroccan credit accounts
• Data not current 3-6 months to upload Financial
  Institutions updates
• Data distributed as aggregated values / credit
  type not by single account
• Important information missing debt arrears and
  credit charge-off not stored
• Historical data stored on the CR database but not
  used for reporting purposes
• Previous searches lists not stored
• A cumbersome, often manual, expensive system
  fax, mail, diskette, e-mail 60/80 per day
• Data consolidation manually intensive 6 people
  to load 15,000 records per year
• Multiple credit files for same person
• Not an exception in MENA rather the norm

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The project contents, objectives, issues
opportunities

• PROJECT CONTENTS
• In 2005 BAM engaged itself in introducing best
  practice credit reporting in Morocco
• However with scope limited to the upgrade of
  their Public Credit Registryinitially!
• IFC to provide advice and technical assistance
  throughout the project
• OBJECTIVES
• Establish a functioning Public Credit Registry
  (no threshold, on-line, web-based system, full -
  positive information)
• Reduce NPL (MFI over indebtedness starting)
  increase access to credit, reduce credit costs
• Introduce financial literacy concept of
  borrowers payment behavior / history (benefits
  and social responsibilities)
• ISSUES
• Mushrooming of fragmented info-sharing
  initiatives with no long term vision and lack of
  cooperation
• Reluctance of key lenders to share information
  (particularly among different sectors)
• Uncertain regulatory framework
• OPPORTUNITIES
• Chance to create a solid infrastructure in the
  private sector and reform
• First francophone country with a PCB ( and a
  model for other emerging countries)
• BAMs reputation and role (regulator of all FIs
  capable to enable business environment for
  credit reporting)

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IFC Technical assistancemilestones (July 2006
Nov 2007)
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Contents

• . . . .1
• . . . . 2

A system to be reivented
Recommended solution and lessons learned
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IFCs recommendations

• Support establishment of Private Credit Bureaus
  and focus the PCR on supervision
• Create an open, competitive, non monopolistic
  credit reporting industry
• Strategic guidelines adopted (Ecuador model!)
• All regulated entities mandated to supply BAM,
  monthly, with all data on all loans
• Consumers consent not required for regulated
  entities
• Lenders mandated to inquire a PCB before granting
  credit
• BAM to consolidate data and supply all licensed
  PCBs with the same information base
• Non-regulated lenders as well allowed to share
  data with PCBs (customers consent required)
• After first PCB operations start-up, lenders no
  longer allowed to consult BAMs registry
• BAM is the only supervising and licensing
  authority for PCBs
• BAM allowed to access any PCBs database for
  supervision/systemic risk prevention
• Banks and FIs cannot own more than 5 of a PCB
  individually, and 30 as a group
• Code of Conduct and other norms enforced through
  simple BAM regulations/circulars

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Mandatory data sharing flow in Morocco
Credit Applicants (information)
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REGULATED ENTITIES BANKS
REGULATED ENTITIES NBFI
REGULATED ENTITIES MFI
NON-REGULATED COMMERCIAL ENTITIES
NON-REGULATED FINANCIAL ENTITIES
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Bank Al-Maghrib (no borrowers consent)
(with borrowers consent)
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3
PCB 1
PCB 2
PCB 3
PCB 4
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Bank 1
Bank 3
Bank 2
MFI
TELCO
NBFI
RETAILER
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Advantages of the model

• First class credit reporting
• Establishes an open, full-file, non fragmented
  credit reporting system,
• Includes non-regulated lenders
• Creates the ground for a competitive, dynamic
  information sharing market
• Prevents monopoly
• Fully protects consumers rights
• Allows any PCB providers fulfilling BAMs
  requirements to operate (local or international)
• Prevents PCR's unintentional but detrimental
  competition to PCBs
• Supplies BAM with a wealth of information at no
  cost, for primary objective supervision
• Gives BAM a key role (supervising and licensing
  authority)
• Frees BAM from other petty responsibility
  (technical, legal, investment, borrowers
  handling)

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Learned lessons 1 - Public Registries should
not compete with PCB
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Learned lesson 2 - Do it yourself? Think again!
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Learned lesson 3 - Do not underestimate lenders
need for awareness
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Learned lessons 4 Enlightened regulators WANTED!

• Indeed successful projects need regulators, with
  standing, vision, farsightedness

• Focus on enabling the business environment
• convince the stakeholders about the benefits
  introduced by the change
• introduce best practices and radical reforms
• eradicate obstacles for the establishment of
  private information sharing
• focus and limit the PCR to supervision purposes
• Trigger the enforcement of a specific and
  appropriate legal framework that
• Protect consumers rights without inhibiting PCB
  development investment
• Foster pooling of information, impede
  verticalization of the industry, and monopolies
• Create complementarities between PCR and PCBs
  rather than competition
• Dedicate substantial amount of time, resources
  in
• Involving the major stakeholders
• Educating the key players
• Consider borrowers financial education needs and
  campaign pro-actively involving lenders
• And an enlightened Project Manager, with
  capacity to advice stakeholders on best solution

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IFC - Credit Bureau Knowledge Guide
Thank you!
Oscar Madeddu omadeddu_at_ifc.org
Available on www.ifc.org
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The mother of all lessons?PCBs give information
bankers take decisions

• SECURITAZION
• transferring risk from people who are supposed to
  know / borrowers to people who did not
• made the banks lose economic incentive to use
  updated and reliable information
• In 2006, subprime loans accounted for more than
  20 of total origination (up from 8 in 2001)
• about 630 billion (3.5 mn subprime loans) to
  reset in 2009. More than 80 are 2/28 originated
  in 2005-06
• 2 million houses will foreclose in the next two
  years
• GREED!
• Lax underwriting with a population that was
  clearly indicated as poor risk by PCB and scoring
• Economic incentive not to use information (high
  volumes at high rates)
• Massively swapping risk for higher interest rates
• The 105 loan / ARM- no down payment - 12 months
  deferred first installment!
• LACK OF FINANCIAL LITERACY
• Offer of sophisticated and risky products to a
  population with low or no financial education
• EXTERNAL VARIABLES
• For the first time ever houses value lower than
  loan value itself subliminal incentive to
  foreclose loans

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Mother of all Lessons?

• The perfect, selfless, institutional, appropriate
  role played by BAM

• Taken the lead of the project and sped up
  development
• Fully enabled the environment (both business and
  legal framework)
• Eradicated all obstacles to the development of
  Private credit reporting
• Prevented market fragmentation
• Introduced first class credit reporting
• Avoided to become a competitor (intentional
  /unintentional) of the private sector
• Focused on institutional role
• Shown authoritativeness, and leadership
  increasing BAMs own image among lenders

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From Virtuos to Vicious circle
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Project roadmap milestones

• October 2005
• IFCs country credit reporting diagnostic
• November 2005
• assessment recommendations report submission to
  BAM
• February 2006
• BAM changes art. 120 of Banking Law,
• BAM entitled to decide whether to handle the
  credit reporting in-house or delegate to private
  sector.
• March 2006
• IFCs presentation of key findings
  recommendations to BAM Governor
• IFCs recommendation to allow establishment of
  private credit reporting
• May 2006
• BAMs decision to allow the establishment of
  Private Credit Bureaus in the country
• Parallel project to refurbish Public Credit
  Registry
• BAMs official request of IFCs TA to support the
  Delegation of the PCR to the private sector

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Non si uccidono cosi anche i cavalli?
Non-Agency Mortgages (Rate Resets)
Mortgages Outstanding
Subprime Mortgages 60-day Delinquencies
Source Lehman Brothers

• About 630 billion (approx 3.5 million subprime
  loans) will reset through 2009. More than 80
  are 2/28s originated in 2005-2006. Upcoming rate
  resets will trigger more foreclosures as home
  owners cannot make new payments.
• In 2006, subprime loans accounted for more than
  20 of total origination (up from 8 in 2001).
• Based on Lehman forecasts, cumulative defaults of
  subprime loans originated in 2006/07 could reach
  40.
• Lehman also forecasts 2 million houses will
  foreclose over the next two years. This will put
  pressure on prices as lenders liquidate holdings.
• All of this will continue to add pressure to
  banks balance sheets and will cause investors
  to be risk adverse

Foreclosures - Forecast
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And it is not allWhat about Credit Cards,
Auto Loans ?

• Losses may be spreading from subprime to near
  prime mortgage, to commercial real estate, to
  auto loans and credit cards.

Source Fitch
Source FED, Merrill Lynch

• A weakening economy, rising unemployment,
  geographic weaknesses, residential mortgage
  spillover, and a highly leveraged consumer, all
  pressured credit metrics of US auto lenders in
  the second half of 2007. Fitch believes the same
  headwinds will lead to further asset quality
  deterioration in 2008.
• Credit Card delinquencies have also shown signs
  of deterioration and are affected by these same
  factors.
• Increased losses in these sectors will strain
  consumer confidence and banks balance sheets
  even further.

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How much will this Cost ?
670 billion (approx. 5 of GDP) But
excludes Significant deterioration in Credit
cards / Auto loans. Nobody knows the true extent
of the damage
Source Merrill Lynch
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Banks Tightening Credit for all Borrowers
Exacerbating the Downside ?

• Credit standards continue to be tightened for all
  loan types

Source FRB, Senior Loan Officer Surveys

• Loan spreads increase sharply starting late 2007

• With tightened standards and higher spreads, loan
  demand drops

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The Road to the Project milestones

• October 2005
• IFCs country credit reporting diagnostic
• November 2005
• assessment recommendations report submission to
  BAM
• February 2006
• BAM changes art. 120 of Banking Law, entitling it
  to decide whether to handle the credit reporting
  infrastructure in-house or delegate it to the
  private sector.
• March 2006
• Presentation of key findings recommendations to
  BAM Governor
• IFC recommendation to allow establishment of
  private credit reporting
• May 2006
• BAMs decision to allow the establishment of
  Private Credit Bureaus in the country
• Parallel project to refurbish Public Credit
  Registry
• BAMs official request of IFC Technical
  Assistance to support the Delegation of the
  Centrale des Risques to the private sector

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A core task enable legal framework

• 1. BAM changes art. 120 of Banking Law,
  establishing
• Banks, NBFI, MFI are mandated to supply BAM
  with all info needed to manage the PCR
• BAM empowered to decide whether to handle credit
  reporting in-house or delegate to private sector
• The governor can determine merely with
  circulars the operational procedures
• All existing vertical initiatives put on hold
  until final strategy is decided (PCB or PCR?)
• 2. BAM issues 3 circulars to
• Define main Code of Conduct rules
• Identify all the information that FIs. will
  have to compulsory provide to BAM
• Mandate Financial Institutions to consult a PCB
• Define responsibilities/procedures
• Determine penalties to be applied to Fis in case
  of law/circulars violation
• 3. BAM defines rules regulating PCBs set-up,
  operations
• Public service continuity and users equal
  treatment to be ensured
• Good governance and service developed following
  international best practice
• Confidentiality for PCBs members, managers,
  personnel
• Availability, security, integrity of information
  top priority
• Procedures and deadlines concerning consumers
  care, rights enforcement, information disputing